Newspaper war raises media issues

CBS.MarketWatch.com

SAN FRANCISCO (AP) -- The antitrust ruling that may decide the fate of San Francisco's newspapers also raises a host of questions about the changing nature of media.

The Hearst Corp. is attempting to dissolve the joint operating agreement that has tied the morning Chronicle and the afternoon Examiner since 1965. Hearst wants to buy the Chronicle for $660 million and hand over the Examiner -- along with a $66 million subsidy over three years -- to San Francisco publisher Ted Fang.

Clint Reilly, a failed bidder for the Examiner, sued to block Hearst's plans, arguing that Hearst is trying to boost its profits by creating an illegal monopoly.

Ultimately, Hearst believes Fang should recast the Examiner as a leaner, suburban-style paper. But before it can jettison the paper, Hearst is on a quest to convince a U.S. District Judge that the Examiner is failing.

Hearst attorney Gary Halling said the cornerstone of his case is that the Examiner fits the definition of a "failing business" under antitrust law, and that Hearst can therefore get rid of the paper. The theory is that as a collapsing business, it isn't much of a challenger and can be disposed of without hurting competition.

But a look at the bottom line shows that the Examiner is far from a failure. To the contrary, the Examiner is making more money than the Chronicle, since it has fewer expenses yet splits revenue 50-50 with its much larger morning rival. These profits are expected to continue through the end of the JOA in 2005.

The case could also turn on geography. Both sides have tried to define the relevant economic market, and thus gauge whether competition would suffer after the deal.

Hearst argues that the market is the nine-county San Francisco Bay Area, where the two papers compete with the San Jose Mercury News and other well-financed competitors owned by Knight Ridder
KRI, +1.35%
the New York Times Co.
NYT, +0.81%
Gannett Corp.
GCI, +0.84%
and Dean Singleton's MediaNews Inc.

Lawyers for Reilly counter that the judge can't ignore the core San Francisco market, where the Chronicle would control up to 97 percent of all daily newspaper circulation.

Herbert Hovenkamp, the primary author of the 18-volume "Antitrust Law" series, said he agrees with Hearst's definition of the market. But he notes that the U.S. Supreme Court has ruled otherwise in the past, ruling in 1966 that anticompetitive effects in a submarket cannot be counterbalanced by improved competition in the regional market.

Another question is how much the market analysis should include media other than newspapers. Hovenkamp says that while alternate media outlets -- including Internet sites -- are unlikely to exert price pressure on the amount readers pay for their paper, they can add to competition for advertising.

Jesse Markham, an antitrust attorney at Orrick Harrington & Sutcliffe in San Francisco, said the city's two newspapers have been most competitive over readership.

"There is competition between the Examiner and the Chronicle," said Markham. "It is not price competition for advertisers. They compete for eyes. They compete editorially."

Several antitrust experts said a potential failure of a Fang-owned Examiner has bearing in the case.

Readers would be deprived of "quality of choice" if the new Examiner fails, Markham said. And Hovenkamp said any decline in the paper's quality would violate antitrust law.

Hearst and the Chronicle have asked to have the case thrown out on grounds that Reilly would not suffer any economic hardship even if the Examiner folds, and thus does not have standing to sue.

Stephen Barnett, an antitrust expert at the University of California, Berkeley's Boalt Hall law school, said he believes Reilly has standing simply by showing that as a consumer, he would suffer if either paper declines in quality.

The newspaper case has drawn widespread attention from readers, legal experts and media analysts. Examiner Editor Tim White shocked the city when he testified he offered favorable editorials for Mayor Willie Brown's support of the deal. That prompted several protest letters by Chronicle and Examiner staffers, who considered the alleged offer a violation of mainstream journalistic ethics, and Hearst hired a former judge to probe White's comments.

Yet those headline-grabbing moments have little to do with the core of the case, noted David Balabanian, an attorney for Fang.

"All this other stuff about politics and the editorial integrity of the Examiner, which has been very titillating, has zero to do with the antitrust issue," Balabanian said.

Legal experts are already anticipating with numerous economic and legal questions at hand, the case will eventually move to the 9th U.S. Circuit Court of Appeals.

"You're in a period of great transition in the way people get their news," said Mary Cranston, an antitrust expert at Pillsbury Madison & Sutro, San Francisco's oldest and largest law firm. "I think it's a complicated analysis. It's hard to get a real handle on."

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